The only thing worse than paying taxes is paying more than you need to due to avoidable mistakes. Tax filing is challenging enough without the added pressure of costly errors, but with changing regulations, it can be even harder.
Updates to tax brackets and credits and looming Beneficial Ownership Information (BOI) requirements can be daunting for corporations and individuals to navigate. In this blog, we delve into the top tax filing mistakes to avoid and how to stay ahead of these challenges.
Incorrectly Reporting Income
Omitting income has become a common mistake, especially with the rise of the gig economy. Our CPAs have also found that many individuals overlook non-traditional income sources, such as interest or crypto transactions.
With increased IRS scrutiny on digital asset reporting, documenting all income sources is more important than ever. When filing your 2024 taxes, keep these 2025 adjustments in mind:
- Standard Deduction Increase: The standard deduction has risen to $15,000 for single filers and $30,000 for married couples filing jointly, up from $14,600 and $29,200, respectively.
- Marginal Rate Changes: Income thresholds for tax brackets have shifted. For instance, the 24% tax bracket now starts at $103,350 for individuals, up from $95,376 in 2023.
- Foreign Earned Income Exclusion: This exclusion has increased to $130,000 from $126,500, providing greater relief for individuals with international income.
For corporations, the IRS has introduced stricter rules for documenting foreign income. Also, failing to report income from non-traditional sources can lead to penalties.
The Wrong Tax Filing Status
Not all filing statuses are created equal when it comes to tax rates and deductions. Are you single or married? Do you have dependents? This determines your filing status. For businesses, your entity type plays a similar role.
For individuals, there are five filing statuses, each with their own tax implications:
- Single,
- Married Filing Jointly,
- Married Filing Separately,
- Head of Household, and Qualifying Widow(er) with Dependent Child.
Selecting the wrong status can mean missing out on valuable deductions or credits. The standard deduction for Heads of Household in 2025 is $22,500, for example. This is significantly higher than the $15,000 for Single filers.
Similarly, choosing the wrong entity structure for your business, can result in miscalculated taxes. An LLC taxed as a sole proprietorship might face higher self-employment taxes and miss out on the Qualified Business Income deduction, for example.
Overlooking Deductions and Credits
Failing to understand the tax deductions you might be eligible for is one of the most costly tax mistakes for individuals and businesses alike.
For individuals, the following common deductions often go unnoticed:
- Student Loan Interest: Deduct up to $2,500 in interest paid on qualified student loans, depending on income limits.
- Home Office Expenses: Many freelancers and remote workers fail to claim this deduction, which applies if you use a portion of your home exclusively and regularly for work.
- Unreimbursed Medical Expenses: Deduct medical costs that exceed 7.5% of your adjusted gross income, including treatments and prescriptions.
For corporations, the same goes for Research and Development (R&D) and Employee Retention Credit (ERC). Both are frequently underutilized due to inadequate documentation or misunderstanding eligibility requirements.
- R&D Tax Credit. Rewards businesses for innovation and process improvement.
- Employee Retention Credit (ERC). Available to businesses that retained employees during periods of COVID-19 economic hardship – between March 12, 2020, and before Jan. 1, 2022. Eligibility and credit amounts vary but can be claimed when submitting back taxes, until April 15, 2025.
Inaccurate or Incomplete Tax Information
Much like overlooking deductions or choosing the wrong filing status, inaccurate information on your tax form can cost you. For individuals, common mistakes include:
- Providing incorrect Social Security numbers,
- Address mismatches,
- Missing or incorrect deductions.
For corporations, it is important to be aware of common errors like incorrect tax ID numbers, mismatched filing statuses, or missing financial statements.
Penalties for Late Payments
This is by far the most avoidable mistake, yet our CPAs find it to be one of the most common. Here’s what you need to know about missing tax deadlines.
For Individuals:
- Penalties for Late Filing: The IRS imposes a penalty of 5% of unpaid taxes for each month (or part of a month) that a return is late, up to 25% of the unpaid balance.
- Penalties for Late Payment: The penalty is typically 0.5% of unpaid taxes for each month the payment is late, up to 25% of the unpaid balance.
For Corporations:
- Quarterly Estimated Taxes: Failing to meet quarterly estimated tax deadlines can result in underpayment penalties, especially for businesses with fluctuating income.
- Tax Credit Deadlines: Missing filing deadlines for specific business-related tax credits, such as the R&D tax credit, can mean losing out.
- Annual Returns and Extensions: Failing to file annual returns or request extensions on time can lead to penalties.
Misunderstanding State and Local Tax Obligations
If your business operates across multiple state lines or you travel for work in your individual capacity, your taxes can become significantly more complex. Different states impose varying tax rates, healthcare mandates, and residency rules. For corporations, distinct sales and income tax regulations apply. Understanding your tax liability per state is key to staying compliant and the possibility of double taxation.
Outdated Records
Keeping your personal and business details updated with the IRS is important to avoid the following.
- Delayed Refunds: If personal details, such as a name change after marriage or divorce, don’t match IRS records, it can delay refund processing.
- Missed Tax Benefits: For individuals, failing to update dependent information can result in missed tax credits or deductions. For businesses, outdated records may lead to missed opportunities for tax credits.
- Compliance Penalties: Incorrect or outdated information can result in non-compliance penalties or trigger audits for both individuals and businesses.
At Fusion, our CPAs specialize in compliant tax filing. From identifying overlooked deductions to navigating multi-state tax requirements, we’re here to make the process seamless. Contact us for help today!
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.